Shares of global semiconductor giant Nvidia (NASDAQ:NVDA) have caught fire lately, rising more than 30% over the past three months and shooting above the $200 level for the first time in roughly a year.
The huge rally of Nvidia stock can be attributed to improving trends across the entire semiconductor market, sparked by easing trade tensions. Consequently, investors have become more optimistic that semi stocks can return to growth mode.
As investors have increasingly adopted this attitude, NVDA stock has roared higher. That dynamic should persist for the foreseeable future.
With NVDA’s near-term operational trends improving and its long-term fundamentals remaining robust, Nvidia stock has enough firepower behind it to keep grinding higher for the foreseeable future.
At this point, worries about the valuation of Nvidia stock are starting to emerge. But those worries will pass with time. Once they do, Nvidia stock should stay on a multi-year march higher towards $300.
Investors should not chase the rally of Nvidia stock. But they should buy NVDA stock once it cools off a bit and then hold it for the long haul because over the long-term, NVDA will reach $300.
NVDA’s Near-Term Trends Are Improving
Nvidia stock has caught fire over the past several months. During that stretch, multiple signs have indicated that the worst of the 2018-19 semiconductor slowdown is over.
First, and foremost, the major culprit behind the semiconductor market slowdown — the U.S.-China trade war — is inching towards a resolution. With trade tensions between the countries easing, global geopolitical uncertainty and anxiety levels are dropping. As a result, corporate confidence and capital-spending levels are rebounding.
Second, data from the Semiconductor Industry Association shows that global semi sales are rebounding. After several consecutive months of declines, global semi sales rose 1.7% month-over-month in July 2019. Sales proceeded to climb 2.5% in August, and 3.4% in September.
Third, worldwide manufacturing PMI readings — which have been depressed and declining for the past several months — are finally starting to improve. According to data compiled by Yardeni, global manufacturing PMI readings have improved over the past few months, led by a big jump in emerging economies’ manufacturing PMIs and the stabilization of advanced economies’ manufacturing PMIs.
Fourth, strong third-quarter results from Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) also indicate that this market is rebounding. Specifically, both companies reported better-than-expected numbers than last quarter, with both management teams citing a rebound in data-centric demand as a reason for their ability to surpass consensus estimates.
Given all of these signs, it is becoming increasingly clear that the semiconductor market could be in the early stages of a huge rebound.
Nvidia Stock Is Heading for $300
Today’s semiconductor turnaround is the beginning of a multi-year rally by the sector that will push Nvidia stock towards $300.
Nvidia’s various products together enable graphics for multiple growth industries like cloud, Internet-of-Things, and artificial intelligence.
These industries are generating most of the global semiconductor market’s roughly 5% growth. Because of its leadership position in the chip sector’s biggest growth engines, NVDA looks well-positioned to steadily gain market share.
Indeed, Nvidia’s share of the global semi market has climbed from 1.5% in 2015 to 2.5% in 2018. NVDA will continue to gain market share. The global semi market — which is down big in 2019 — will rebound in 2020, and continue to grow at a steady rate of roughly 5% thereafter, powered by continuous data and AI tailwinds.
Thus, NVDA’s revenue should easily increase at least 10% over the next few years. Its gross margins will trend higher as steady demand and limited supply pushes average prices higher. Its operating-spending rates will fall as it grows, and it will continue buying back Nvidia stock.
Given all of its positive characteristics, Nvidia’s profits should increase about 20% annually. If that does occur, I think the company’s earnings per share can reach $15 by 2025. Based on a forward earnings multiple of 20, which is average for growth stocks, that equates to a 2024 price target for Nvidia stock of $300.
That’s where Nvidia stock will trend over the next few years.
The Bottom Line on NVDA Stock
Nvidia stock has surged above $200 for the first time since last November as the global semiconductor market, which has been hit hard by trade tensions over the past year, appears to be on the cusp of a big rebound. Ultimately, this rebound will cause Nvidia stock to reach $300 over the next few years.
But it’s not quite time to chase the rally. My 2024 price target for Nvidia stock is $300. Discounted back by 10% per year, that equates to a 2020 price target of just over $200.
Thus, while Nvidia stock can significantly climb over the long-term, investors are now worried about the valuation of NVDA.
While the recent strength of the chip market confirms that NVDA stock is a long-term winner, I wouldn’t buy the shares at this point. Instead, I’d wait for the stock to cool down and then buy NVDA on a pullback.
As of this writing, Luke Lango was long INTC and AMD.